Get Pre-Qualified or Pre-Approved
TLDR: A pre-qualification letter is a tentative approval that you include with your offer letter. You’ll get pre-approved once the lender has vetted the information you provided. A final approval happens after the lender has confirmed that both you and the property you wish to purchase have met all of the lender's requirements.
What's the difference between getting pre-qualified and pre-approved? Do I need both, or just one (and if one, which one)?
If you're not getting a loan, you don't need either. If you're like most people and are getting a loan, you don't need both, but you will at minimum need to be pre-qualified. A pre-qualification letter states that you'll be approved if what you say about your financial situation is true. You won't be able to get pre-approved until the lender has verified the statements about your financial situation. The actual approval involves a more thorough vetting of your financial documents.
Sellers like to see a pre-qualification or pre-approval letter in addition to your offer to demonstrate that you're qualified to buy their property. Buyers can get pre-qualified by simply filling out what amounts to a questionnaire for the lender, assuming your financials meet the bank's lending criteria. It is worth mentioning that pre-qualifications are not approvals by any means, but it will typically suffice if you're in a hurry to make an offer. The more legitimate of the two is the pre-approval, which you get when the lender has verified your income and expenses.
Tip: Your proof of funding should match your offer price
Don’t get a letter from the lender until you know how much you intend to offer on your property of choice so that you can modify the letter to match the offer price. If you're offering a seller less than their asking price and your letter states you're more than qualified to meet their asking price, they may be less inclined to accept. Don't show your hand in a game of poker!
Does a pre-approval letter guarantee the lender's approval? Who makes the final call as to whether I'm approved, and how long does that process take?
Despite its name, a pre-approval letter is not actually the final stamp of approval by the lender. The underwriter is a sort of analyst/accountant who has no interaction with the buyer and ensures the lender's financial commitment to your house makes sense. Without the underwriter's consent, you won't get the green light to proceed with the purchase. Issues highlighted by the underwriter are the most common reason for last minute delays in closing.
What are my options if I'm not approved?
Not getting approved by a lender is never an enjoyable experience as it can mean losing the house you want to buy. The good news is that different lenders have varying criteria for approval, so you may have better luck with a different lender if the seller will permit the delay in closing. Additional good news is that your financing contingency, if you include one, will ensure your earnest money deposit (EMD) is returned to you.